The draft Corporate Income Tax Law is now under discussion at
the ongoing NPC session, and will be presented for voting on March
16, 2007. A provision of particular interest stipulates the
unification or standardization of the rate of taxation at 25
percent, applicable to both domestic and foreign companies. In our
special series on the Corporate Income Tax Law, we’ll be
interviewing NPC deputies, entrepreneurs, industry leaders, and
scholars for their take on the proposed unified tax rate, its
significance, and potential impact on China’s industry and economy.
The following is our third interview with a Hong Kong deputy
Lau Pui-king. The fourth interview with a Jiangsu
Province deputy, Jiang Deming, comes tomorrow. –
Editor.
To unify or standardize the corporate income tax rate applicable
to both domestic and foreign companies is a positive move,
according to Hong Kong deputy Lau Pui-king in an interview with
china.org.cn, adding that enterprises prefer a fairer and more open
market.
"China implemented its opening-up policy almost 29 years ago and
is now a member of the World Trade Organization (WTO). A more
mature economic market is being developed and therefore a fairer
tax policy is needed," she said.
China's stable political situation, sound economic development
model, huge market, labor sources, and business infrastructure and
government service that are being continuously upgraded are the
major factors attracting foreign investment.
As such, tax breaks are considered less important than
transparent taxation and impartial government policies.
Lau highlighted that the different tax rates for domestic and
foreign companies in different regions are an issue. "It is a kind
of distortion of investment. The domestic companies contribute
about 80 percent of all corporate tax revenues.
"The proposed unified tax rate will help foster a fairer, more
regulated and transparent taxation system for all businesses, and
help improve the quality and standard of foreign investment
utilization."
However, critics argue that an across-the-board 25 percent rate
of taxation -- a significant change from the current 15 to 33
percent range -- would jack up the combined tax bill of all
foreign-funded enterprises by US$5 billion a year.
Lau's response is that companies should view the whole of China
as a market, and not merely focus on certain regions.
"For example, if a company pays 15 percent in one city but has
to pay up to 33 percent in 50 other cities, wouldn't a standardized
25 percent mean less tax?"
Moreover, the 25 percent rate is comparable to the global
average of 26 percent.
"(The new tax rate) will spell more opportunities both for
domestic enterprises and foreign ones. In fact, the move will
encourage companies to spread out more across the country, which
will give small to medium-sized companies more room to
develop."
She added that she did not expect any reduction in foreign
investment as a result of the change.
Last year, China reported record tax revenues of 3.76 trillion
yuan (US$485.6 billion), excluding tariffs, tax on farmland
acquisition and tax on real estate contracts. Foreign-funded
companies contributed 153.4 billion yuan (US$19.8 billion), or 4
percent of the total.
The figures show that domestic companies contribute the bulk of
tax revenues. By official calculations, the new rate will reduce
tax payable by domestic companies by 134 billion yuan (US$17.3
billion). Foreign companies will correspondingly pay about 41
billion yuan (US$5.3 billion) more in taxes. Despite this, however,
the state coffers will see a reduction of 93 billion yuan (US$12
billion) overall.
Nonetheless, China's fast growing economy, improved
competitiveness of businesses and growth momentum of fiscal revenue
have convinced tax and financial officials that the country can
manage the loss.
Transitional preferential measures will be given to allow the
old enterprises, which had an income tax rate of 15 percent or 24
percent under the current tax laws, to enjoy a gradually increasing
income tax rate within five years after the new tax law takes
effect, according to the draft law.
At the same time, preferential tax policies will be shifted to
investment in projects concerning environmental protection, water
conservation, production safety and high-tech development.
Our previous two interviews:
Sichuan Deputy: Tax Cut Good News for Chinese
Companies
Standardized Corporate Tax Rates for Level Playing
Field
(China.org.cn by staff reporter Wang Ke, March 10, 2007)
